A Little Dry Powder is Always Good

We have been reviewing our holdings this morning and pondering raising a little cash–I’m talking a few percentage points more. We already have plenty in the money market (either FDRXX in Fidelity at 1.88% today or GABXX at 2.14% today) as well as plenty of Kayne Anderson 3.50% Mandatory redemption preferred (KYN-F) which serves as a ‘cash’ proxy for us. The question is when to deploy it in a more productive manner (higher yield). This is always the $10,000 question.

With equities down over 450 points, at this moment, we are wondering if we will see ‘the baby thrown out with the bath water’ if we get that down 1000 point DJIA day. Obviously we have no idea whether this would happen, but if you look at the number of preferreds down by 1-4% today it is large—losers are far greater than winners. Additionally as we look at the number of new lows (or near new lows) the number is growing in the preferred arena. All of this is occurring as the 10 year yield remains flat or even off a bit.

35 thoughts on “A Little Dry Powder is Always Good”

Geodad, I am in running for puny purchase of the day. Got a 100 more CNIGO bought at $26… A total uninspiring 5.1% until 2023 mandatory maturity. I own a bunch of this and have bought anywhere from $26.50 to $25 over time. Just plan on collecting coupon until maturity. But at times I have sold when people a year ago were bidding to $27.50 over a year ago. Hopefully no dumb bids ever pop up so I wont be tempted again , lol.

I’m new at this, but I picked up a few hundred shares of AILLL yesterday at 26.41 – trying to decide whether to try for a .50 or more flip or just hold. What were the reasons again that it’s a low call risk? thanks!

Geo, I really think for most this is an issue that squeezes maximum yeild at maximum safety. Find a 6.25% with a 100 times dividend coverage from profits, with covenant protection from minimal loan coverage ratios also.
For me its a bit different….When I first got into preferreds 6 years ago, I researched preferreds pretty thoroughly and most of it was absolutely negative…Low in cap stack, asymetric risk, duration risk, etc. etc… Then studying 08-09 preferreds really was a zero vote of confidence LOL.
So I started digging into utility preferreds and noticed some have paid for almost 100 years without interuption. I knew the above company well, I trust the founding part of the companies history as it is in my service area, and the above market yield for that sector due to the “anchoring of par” made the yield compelling on a relative basis. Plus I knew I wouldnt get screwed on my payment. Needless to say it was my first held issue. So for me this is an anchoring hold and has been since inception. Due trade it some, but like a core of it always. I have a pension and that is all I need as I dont even spend it. So if I wasnt having fun investing, I would just have all my money in this and not do anything. And if it ever got called, so be it.

Tim, Deciding the amount of cash to hold has been challenging. I’m standing at the front of the line of those who’ve left too much cash idling over the last 7 years (while we instead focused on hard assets like apartment buildings). For me, it’s been a long and expensive wait for the “too low too long fed”. I share your concern about BDCs. It’s inordinately time-consuming to learn about what lurks beneath the good-looking bobbles on top of those baskets. IG preferreds with acceptable yield/risk margins are on the rise and I am finally in buy-mode, but still unbalanced in cash. Duration is a risk on some issues, though for those with yields near the LT average, with IG ratings, I’ll happily hold them to maturity and do not look at them day-to-day.

Alpha8–when I can get the investment grade CEF preferreds (mostly Gabelli family issues) at 6% or better (wishful thinking I would get 7%) I would be in they big and like you wouldn’t pay attention day to day–the junky stuff I babysit.

The lazy part of me wants to drop everything into a handful of issues and never look back! I’ll confess to recently having picked up a few blocks of KTBA with the thought my kids will someday inherit it. That kind of duration exposure is an outlier for me but it is so contrary to the current rising rate environment it actually became appealing! That line of the spreadsheet is going to be quiet for a long time.

MFZ, that is the risk one takes…ALLY investor relations have already publically stated the next payment 53.67 cents in February up from 51.74 this month. This is what is known. So outside of the value of time loss, the call loss is minimal. For the risk I find the potential reward worth it. But that is an individual decision. If it doesnt, history has shown a consistent flip opportunity over 26.30 before exD. If one is wanting to buy expecting many years of redemption free income, I wouldnt be one to suggest that is possible at all, and would be inclined to suggest that will not happen. But that is just my personal know nothing opinion.

MFZ, the beauty of it since you already hold, there is little exposed loss with a February redemption. I am sure I will try to trade the bouce closer to exD time if it occurs. ALLY-A this summer dipped in 25.50s this past summer briefly after payment. I couldnt get my phone app up and logged in, in time to get them as I was on golf course. I then got greedy and set the bid too low, but it didnt hit…

ALLY-A dropped lower at open. Being a liquid issue it can move with movement of markets. Trading now below next divi. That being said as much as I would like to ave down here, I wont. I own what I own and will let it play out. It still is a bank and the risk associated with such. It is heavily into auto financing and has a chunk debt as “capital” for the bank. One should always be mindful this is not one of the “prestine balance sheet” banks and never get greedy here. Just my opinion. I didnt want to make it sound like I want to corner the market on this issue…Which is impossible anyways since it is in the billions, lol.

I have been ‘re-balancing’ for the past 18 months or so, lowering total Preferreds percentages of portfolios, increasing CEFs portions. Especially Muni-CEFs. Basically wanting to target appx. 40 – 45% Preferreds + small Common allocations, and increase CEFs to around 40 – 50%. Plus some REITs & BDCs. Have sizable Options positions in taxable accounts.

Well .. that is until Preferreds have started falling attractively. Being compelled to add to positions or initiate new Preferred positions given the increasingly attractive Yields.

The trade-offs, IMO, are – Preferreds provide consistent timely distributions coupled with a potential/eventual redemption at Par. This generally keeps their $PPS fairly steady – relative to market. However, they are individual company attached. So, risk is on individual firm performance, and its industry sector.

CEFs tend to have ‘managed distributions’. Over many years, I have learned, sometimes painfully, that these distributions can change. Significantly, depending on CEF or general economy performance. The $PPS can also swing more than Preferreds. However, beneficially, CEFs have diversification. In addition, in-part due to this diversification, they will typically – revert to the mean – over time. While still providing distributions. Cash flow is appreciated!

I have been following Tim, since YH days. Much appreciated commentary by you and the other knowledgeable posters here.
So much more informative and better than the majority of Fin-Sites out there.

Tim, I apologize if this makes me sound like a continual complainer, but the Price Loss list shows only 11 issues in the red today, with many, many, showing “Loading…” Is there a problem with the quote feeder?

I retired in 2010 and discovered preferred stocks about 4 years ago. However, I have often wondered what percent of my total investment portfolio should be devoted to preferred stocks. I am currently working to 20% in Investment grades and 20% in BIG. Anyone care to share their thoughts. The other 60% is spread over an annuity, equities, REITS, CEFs, covered calls, etc.

I am not sure there is a real answer to this. It always depends on the markets as far as I am concerned. I could easily see myself taking a healthy chunk of my investments into a total market index fund if the P/E was around 12 and the economy looked solid. I could easily see myself buying treasury based investments at 7%. Right now, I am about 60% in preferreds/baby bonds which is about my maximum for any single asset class but that also could change

Hi LarryL–I normally have about 50% of our investments in preferreds and baby bonds. The balance is money market, pure cash money and a large chunk with an insurance company that is paying me 4.5% (and has been for years-it is not insured). Right now I have no REITs, MLPs or commons stocks–but that could change tomorrow (or next week). In total maybe 85% remains static–doesn’t change much, but the other 15% is in and out of ‘flips’, REITs etc as situation present themselves.

Tim, I’m 70% in individual IG bonds, baby bonds, preferreds, money markets and cash. I have one REIT and one CEF and no common stocks. Today looks like another good day to have zero in common stock but I appear to be an investing tight wad. Hopefully, some bargains will soon appear.

Larry, Steve is probably correct in there is not an exact answer. But I can tell you this. Any seasoned financial expert from multitudes I have read never recomend more than 20% of your stash in this segment. But like everything it all depends on your goals and strategies. I am probably 90-95% in preferreds. But, I force my preferreds to perform equity and bond like actions, but doing things not as conventional. Ideally with perferreds one would like to be cognizant of sector risk, credit risk, duration risk, and general market risk when making their selections.

I added preferreds a few years ago, after making strong gains in growth stocks. I also hold dividend bearing commons and just recently started writing calls on those commons. The options are working well to increase incoming cash and turning those dividend bearing commons into a very strong yield. We will be entering a recession, its just a matter of time. The big question is HOW hard it will hit corp debt? Corps have been living on cheap credit and have used it to make strong returns. However, as the economy slows, this returns will slow and they will be holding a bag of debt they have to keep making payments on. Its really going to sort out those companies that really have good business and those just living on cheap credit.

Hi sc4–yes I am concerned for all of them as they have a limited operating history. While the law allowing BDCs was passed maybe 25-30 years ago most of the companies are less than 20 years old and many just 5-10 years old (don’t quote me on this stuff–I was researching a couple weeks ago but am just ‘shooting from the hip here. The loans many of them make are at 10-20% interest rates which speaks to the overall quality of the paper. I will try to do a longer writeup in over the holiday weekend. The bottom line is that many of them are untested in recessions and there could be a lot of ‘blood in the streets’.

TIM
Much appreciated. For the reasons you stated have not bought many BDCs but do like ARCC and NEWT. Newt’s rates are lower and size of individual loans smaller. They have also been around for a while. I’m sure that there are others equally interesting. Also liked GAIN but am concerned about issues related to ultimate retirement of D.G and how he will be replaced. As such have backed away from GAIN despite attractive yields and total returns

Many thanks your comments and would value any further analysis you want to make. best SC

In my view, we don’t have to wait long to see the impact of debt. I think it will become apparent soon. Yes, large businesses have most fixed rate debt but as one of the talking heads on business news show today, said 40% of the small cap firms are floating rate debt. I have no idea whether this is true or not.

But either way, those buying debt want higher yields, including all of us. The issue I see is and has been how fast do the rate increases come? We have had low rates for close to ten years. Yes – they need to go up but how fast and do we really need to given inflation rates. If we do have inflation – they yes they need to increase. If it’s just a rush to “normalize”, it may be a mistake of epic proportions. It took us 10 years to get to this point, we don’t need to normalize in 2 years (IMHO)

It’s sure been ugly out there for common stocks today, but most of my preferreds are only down by about .25 cents per share today – so no complaints from this fixed income holder.

I wish there was an easy way to educate individuals on preferred stocks and their benefits. Although rising interest rates are a concern to me, I don’t have to worry that my portfolio will have a 20% correction – unless there would be another event like the financial crisis of about 10 years ago.

Took my 30 years of investing (until I retired) before I screamed ENOUGH of not understanding what my investments are really worth. Did not find preferred stocks until this year. I am smiling even though as a novice, I have a lot to learn and thanks to Tim and folks like you I am. Things like the beauty of term preferred issues. I am off slightly today, looking at potentially starting to buy small amounts from my new shopping list